It's time to begin stalking the real U.S. economy before your portfolio of easily won paper profits gets destroyed by the Fed's first rate increase.
By real U.S. economy I mean what's actually happening inside major companies instead of being married to the macro data. I think several prominent companies that recently announced first-quarter earnings have hinted at a significant bounce back in U.S. economic activity this spring and summer.
And if what execs at the likes of big box retailers Home Depot (HD) and Target (TGT) had to say is in fact true -- the U.S. economy is revving up -- then fresh comments from Fed officials Janet Yellen, Stanley Fischer and Loretta Mester deserve to hold greater weight.
After all, let's face it: the market is fixated on old, weak economic data from the first quarter, dovish Fed minutes and various other outlets supporting the view of a sluggish second quarter that will ultimately leave the Fed on the sidelines this year.
Complacency on risk in its finest form, and we don't need a mega Charter (CHTR) for Time Warner (TWC) deal to lend a hand in helping to determine if asset valuations are starting to get a little steamy.
Check out some of these comments from Target:
In the second quarter, we expect our comparable sales to increase between 2% and 2.5%, reflecting expected growth in digital channel sales in the high-30% range. Both of these expectations are similar to our first-quarter performance and, while it is still early, our results through the first few weeks of the second quarter are consistent with that forecast.
And these from Home Depot:
We haven't changed our outlook for the second quarter. In fact, we haven't changed our outlook for the year and if there's a bias in our forecast, we believe the bias is to be up. We are pleased with our performance in May.
Outdoor project categories were also strong during the quarter as we had double-digit comp sales in Lawnmowers, Chemicals, Outdoor Power Equipment, Planters, Lawn Accessories and Grills.
Target's second quarter has begun on very solid footing as temperatures have risen across the country. The company is seeing particular strength in what I call "vanity" parts of its stores, such as beauty supplies and non-basic apparel. The same strength in "vanity" areas is also being evidenced at Home Depot -- one is only going to invest in planters, lawn accessories (think chemicals to make that grass extra green) and grills if there is a reasonable expectation of hosting summer parties. Hey, summer parties cost a pretty penny nowadays.
Point being is that these little tidbits on the status of the U.S. economy suggest strengthening data in June is likely just before the Fed's meeting on June 16-17. And I fancy that Fed meeting, which is currently being viewed as a "non-event" by market observers, could become a surprising event should we digest better data in coming weeks.
A couple of possible surprises:
- More hawkish tone in the statement, made so by a modestly more optimistic economic assessment.
- More hawkish tone within the Fed's minutes, which could be signaled by Yellen at her press conference.
Just take a gander at the telegraphing being done by Fed officials; it's as if they are warning the market to pay attention right now... sentiment could be about to change.
"Delayed action would risk overheating the economy."
"If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target."
"If the (U.S.) economy is growing very, very slowly we will wait. If the economy is growing faster we will do it quicker."
"What we are thinking about is raising the interest rate from zero, which is an ultra expansionary monetary policy to a quarter percent, which is an extremely expansionary monetary policy. This will be a gradual process."
Loretta Mester (voting member next year)
"If the data comes in according to my forecasts then the time is near where we're going to be wanting to raise rates."
Mr. Fischer may be nonchalant on the impact on markets from the first rate hike, but utilities stocks say otherwise.
Source: Yahoo Finance
Shares continue to lag the broader market ¿ remember, utilities are debt-ridden corporations that could have their earnings whacked from higher rates.